INFORMED DECISIONS SURETY BONDS OR BANK LETTERS OF CREDIT 2013

What Is A Surety Bond? Underwriter Producer Contractor

Three Types of Bonds  Bid  Performance  Payment

What Are Bank Letters of Credit?  Cash guarantee to owner  Called on demand  Payment to owner & loan for contractor  No guarantee of project completion  Irrevocable

Prequalification Surety Bonds  Capital  Capacity  Character Letters of Credit  Single focus  Quality & liquidity of collateral

Borrowing Capacity Surety Bonds  Issued on unsecured basis  Does not diminish borrowing capacity  Credit enhancement Letters of Credit  Assets used as collateral  Diminish existing line of credit  Can affect cash flow

Duration Surety Bonds  Duration of contract  Maintenance period Letters of Credit  Date specific  “Evergreen” clauses

How to Obtain Surety Bonds  Issued through surety bond producers Letters of Credit  Issued through banking or lending institution

Cost Surety Bonds  0.5%-2% of contract price  Includes performance, payment & warranty Letters of Credit  1% of contract amount covered by LOC times number of years of contract

Coverage Surety Bonds  100% performance  100% payment  100% warranty (typical) Letters of Credit  Typically 10% of contract  No protection for unpaid subs

Claims Surety Bonds  Surety investigates claim of default  Surety’s options  Surety pays rightful claims of certain parties

Claims Surety Bonds  Surety investigates claim of default  Surety’s options  Surety pays rightful claims of certain parties Letters of Credit  Payable on demand  Owner determines validity of claims by subs & suppliers

Conclusion  Informed decisions on risk management

For More Information Surety Information Office (SIO) | SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers (NASBP).